The wiring of Main Street, USA

Don't bother visiting the canyons of Manhattan or the asphalt strips of Silicon Valley if you want to see the future of broadband. You'll find that story playing out on Main Street and in the great hinterland.

Rural and small-town America is the fertile ground for growth in fiber-to-the-home for a simple reason: Independent phone companies, home developers and municipalities are motivated to make broadband a reality.

Video is the driver, just as it was for the cable TV industry, which got its start in areas of the nation where people couldn't get broadcast TV reception over the air. Nowadays, small towns and rural areas can't get high-speed data and digital TV and phone services fast enough--and there are plenty of small companies, towns and housing developers willing to provide the fiber connection that will make it possible.

Ask investors and pundits today and a majority will tell you the prospects for the fiber industry of late are poor to non-existent. While this is true for the overbuilt fiber long haul business, there still remains pent-up demand for the services that fiber can provide--if it can reach the people who need and want it.

Thousands of miles of fiber-optic cable were laid in the United States over the past two decades, yet a chasm still exists between the high-speed data and voice networks and the PCs, digital TVs and phones in homes. While even the cheapest PCs have the ability to handle large amounts of data, including digital audio and video, they remain hamstrung by painfully inadequate 56kbps (kilobits per second) modems or slightly better DSL (digital subscriber line) and cable modems. Surveys show that only about 14 percent of homes have cable Internet service and 7 percent have DSL, while the rest have dial-up modems.

Only when there is a fiber-optic connection reaching each house will customers get the full benefits out of the billions of dollars already spent on America's networks and computer systems.

Only when there is a fiber-optic connection reaching each house will customers get the full benefits out of the billions of dollars already spent on America's networks and computer systems. Because of many barriers--not the least being cost and regulatory issues--don't expect the traditional telecom and cable companies to fix the bottleneck.

The next wave
So where will the innovation come from? There are 1,000 independent phone companies across the United States. Companies like SureWest in Roseville, Calif. (a fast-growing suburban area of Sacramento and San Francisco), have strong margins and strong cash flow. Many of these companies are eligible for federal universal service funds because they provide phone services to areas that the regional Bell operating companies (RBOCs) won't or can't touch.

These companies are motivated to provide video and data in addition to phone service in order to improve their top line. Where phone companies won't go, municipalities will. For example, Utopia, a consortium of fast-growing small towns in Utah, is looking to provide high-performance networks to new housing developments.

Add to this the progressive homebuilders who are building sprawling tract housing developments in these areas. These "greenfield" developments are the most cost-effective opportunity to make the home-to-fiber connection.

Outside plant installation costs, such as splicing and labor, continue to drop, especially in these post-telecom bubble times. New trenching equipment and techniques are making it feasible to add fiber to the home a lower cost than ever before.

Consumers would pay just over $100 a month for these bundles, a good deal considering that today DSL or cable modem service alone can cost $50 a month.

In addition, network technology has improved. Fiber-to-home installations can take advantage of the passive optical network, which eliminates the need for expensive electronic components that are prone to failure and obsolescence. Passive optical networks can be equipped to operate with Ethernet, preferred by the computer crowd, or the ATM (asynchronous transfer mode) technology used by telecom companies.

While total costs can vary, fiber-to-the-home in these installations usually averages $2,100 at the low volumes of today. Once the fiber connection is made, however, providers can offer communications packages on one bill that include phone, digital and basic cable TV, video-on-demand, pay-per-view services and high-speed Internet access. Consumers would pay just over $100 a month for these bundles, a good deal considering that today DSL or cable modem service alone can cost $50 a month.

As an investor in start-ups, I'm watching the fiber-to-the-home in small towns and rural areas for signs of companies that are successfully implementing these programs. If the cable TV experience is any guide, the companies that figure out how to make fiber-to-the-home profitable and popular will be on the ground floor of the growth of a major industry.

Once the RBOCs, other telecom companies, regulators and service providers and consumers see proof of the superior services and profits that fiber-to-the-home can provide on a larger scale, we can expect a massive second wave expansion.